Surging labour costs are keeping UK unemployment high
THERE is a straightforward reason why unemployment remains so high in Britain. Unit labour costs are rising – hiring someone to produce a set amount of output is becoming more expensive. And higher prices mean reduced demand – in the jobs market as in everything else.
This may come as a bit of a surprise: high inflation combined with weak pay rises are cutting real wages. While terrible for employees, who are becoming poorer, this ought in theory to be helping workers price themselves back into the jobs market. But weak inflation-adjusted wages are not enough. Wages and other labour costs must also weaken relative to productivity to boost jobs – in other words, relative to output per worker. And productivity has been disastrously bad: GDP is falling, yet employment is stagnating, implying that productivity is falling even faster than real wages. The result is a workforce that is becoming less, rather than more, attractive to employers.
Market sector output per worker in the fourth quarter of 2011 fell 0.9 per cent on a quarter earlier. Market sector output fell a further 0.4 per cent in the first quarter of 2012; employment rose slightly which means that productivity will have fallen further.
Richard Barwell, an economist at Royal Bank of Scotland, estimates that underlying private sector unit wage costs rose an extremely unhealthy 2.4 per cent on a year earlier in the final quarter of 2011. The deterioration will accelerate further this year: he expects annual growth in underlying unit wage costs of close to three per cent during the first two or three quarters.
All of this is bad news for the unemployed. Combined with sterling’s appreciation – we are seen as having a less bad economy than other countries, hence the pound has become a relative safe haven and is nearing three and a half year highs against the euro – rocketing domestic unit wage costs are terrible for Britain’s competitiveness and ability to export.
It sometimes seems as if nothing can go right for the UK economy. What is certain is that our abysmal productivity and cost performance will not be solved by borrowing a few billion more, or printing yet more money. There will be no sustained decline in unemployment until unit labour costs finally start to fall.
Nearly 3m adults aged 20-34 live with their parents – up 20 per cent since 1997, even though the number in that age bracket is largely unchanged. And 47 per cent of 25-34 year olds are homeowners, down from 67 per cent in 1991. The answer is not to artificially lower the price of credit or to force banks to lend to high-risk borrowers. The solution is to build more homes, thus lowering their prices. The Nimbys won’t like it – but the choice is either to get building or to permanently lock out millions of youngsters from the housing market.
I’m often critical of government ministers, Tories as well as Liberal Democrats. But Michael Gove, the secretary of state for education, stands out from most other senior politicians. He is competent, effective and principled. His unfashionable defence of the freedom of the press at the Leveson inquiry yesterday was remarkable for its erudition. He made it clear that illegal behaviour needs to be rooted out – but as he put it, free speech is a “precious liberty” and regulations could easily crush it. If – shock, horror – a vacancy were ever to emerge at the top of the Tory party, I hope that Gove’s friends will be able to persuade him to stand for the leadership.